ON 25th November 2022, Datuk Seri Anwar Ibrahim was finally appointed as the new prime minister,  the tenth in the history of this country.

Although the coalition of parties in Pakatan Harapan (PH) led by him did not get a majority in Parliament, the Yang di-Pertuan Agong has appointed him to lead a unity government consisting of the component parties of PH, Barisan Nasional (BN) and also parties from Sabah and Sarawak.

As is well known, while campaigning to win the election, he made many promises related to the economy. The most important commitment is to deal with the problem of the cost of living.

Many segments of society find that their wages or salaries are becoming increasingly insufficient to support their families.

Therefore, it is likely that the people's demand will grow louder for the government to increase subsidies to ensure the price of cooking oil, food, and other basics are affordable.

In addition, students and graduates, especially from among the poor, will demand that they are not required to pay the PTPTN debt in full.

Some may even demand that the debt be entirely forgiven to the B40 group, as Datuk Seri Anwar Ibrahim promised last October.

In other words, many people hope that this new Prime Minister will solve their economic problems effectively, unlike other prime ministers who made many sweet promises before gaining power but failed to keep their promises once appointed.

Unfortunately, the people need to understand that the government's ability to solve economic problems under the existing system is limited.

In reality, most of the country's economic problems are due to the debt-based nature of our financial system, which is dominated by the banking industry.

Any country that develops its economy by relying on the banking industry will be unable to escape the problem of inflation and the high cost of living.

That is why in western countries such as the United States, Britain and other European countries, their governments have also failed to solve the cost of living problem even though the leaders of those countries have many prominent economic advisers.

For example, almost 70 per cent of the Nobel prize winners in the field of economics come from the United States. However, the country is currently facing a severe cost of living problem.

The inflation problem is more serious, with a rate in October 2022 of 7.7 per cent, compared to Malaysia, whose inflation rate was only 4 per cent.

In Britain, the inflation rate in November this year was more than 11 per cent, which is far worse than many other under-developed and developing countries.

In an inflationary situation where the prices of goods and services rise rapidly while wages and salaries for workers do not increase at the same rate, this situation contributes to the cost of living problem.

As a result, most husbands and wives have to work to earn enough income to support their respective families.

But now, there are more and more cases where the income from both of them is still inadequate. Therefore the husband and wife have to find additional work, such as being a Grab driver or a Foodpanda delivery person or doing various online businesses.

If the government tries to solve the cost of living problem hastily because it wants to remain popular in the eyes of the people, this problem could become more severe in the long term.

For example, if the government wants to solve the cost of living problem by giving more financial aid directly to the people through funds borrowed from financial institutions, not only will the government debt increase, but the inflation problem will also worsen in the future.

Moreover, the government may have to resort to implementing GST to cope with its debt burden, which will add further to the cost of living problem.

Increasing government debt will be unavoidable if the government wants to solve the economic problem by spending more to stimulate the economy. Inflation will also worsen later.

A notable example is the post-COVID-19 situation. As a result of the movement control order imposed by many governments, there was a severe economic downturn, which forced many governments to increase spending to stimulate their economies.

However, because almost all governments do not have sufficient reserve funds, they were forced to borrow massive amounts from the financial industry. As a result, the problem of inflation is now being experienced simultaneously throughout the world.

Another reality that everyone needs to realize is that commercial banks can create money out of thin air in the modern banking system.

Banks no longer need to use deposits from depositors to lend to their customers. As explained by the Bank of England in one of its bulletins published in 2014, the loans the banks give out to their customers create deposits.

Therefore, banks can easily lend vast amounts of money to the government or business organizations. These will increase the deposits in the banks tremendously. It will also generate massive profits for the banks. That is why banks are quite happy to lend money to the government.

In Malaysia, the economic stimulus package amounts to tens of billions of Ringgit. All these funds will contribute to the increase in currency in the national monetary system, thereby simultaneously reducing the value of the money and resulting in inflation in the long run.

At the same time, many business organizations are also facing debt burdens from the banking industry and, therefore, cannot afford to raise the wage rates of their workers.

Some even have to fire workers or cut workers' wages. This situation is the main factor contributing to the cost of living problem.

In such a situation, as long as the banking industry continues to grow, the cost of living problem will still exist, even if the practice of corruption can be eliminated.

The proof is that countries that do not have a severe corruption problem, such as Singapore, Britain, Denmark and Switzerland, are also experiencing the cost of living pain.

For example, in big cities in Switzerland, less than 20 per cent of the population owns a house because the house prices are too high.

Therefore, Malaysians should be aware that the government's ability to solve economic problems, including the cost of living problem, is minimal as long as the country's financial system depends on the banking industry. The situation will worsen if the banking industry grows because it will also mean the national debt levels will also increase.

To solve the cost of the living problem, what is needed is a change in the economic system so that we are no longer dependent on the debt industry.

The best scenario is when our country's financial system adopts the Islamic approach, where institutions such as zakat and waqf dominate the national economy rather than usurious financial institutions.

Of course, this requires widespread donations and infaq among the community to help the poor as an alternative to debt from usurious institutions.

But a change in society's value system is required for this to happen. Pure Islamic values have to replace materialistic values.

Over-emphasis on acquiring worldly wealth needs to end. People should be racing with each other to perform good deeds and are more concerned with obtaining God's pleasure and happiness in the afterlife.

In conclusion, the people need to reduce their dependence on the government, political leaders and western economic experts to solve the country's financial problems.

Society members must realize that they must also play a significant role in solving economic problems. For that reason, da'wah and tarbiah efforts need to be intensified so that the community will appreciate the necessity for nurturing Islamic values.

Piety (taqwa) and success in the afterlife should be the main objectives of life. That, in reality, is the long-term solution to our country's economic problems.


* Prof. Mohd Nazari Ismail is an Honorary Professor attached to the Faculty of Business and Economics,
University of Malaya.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.